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Bitcoin Grows Up But That Means FBAR Filings

Remember when you got out of school and started having to abide by all sorts of rules? Bitcoin and its aficionados probably feel that way, starting to feel the pinch of responsibilities. That’s growing up.

Bitcoin seems newly minted from a desirable school with incredible promise. The appreciation is heady, but rules are rules. Bank of America thinks Bitcoin has arrived, starting analyst coverage. And as China Restricts Banks’ Use of Bitcoin, the heady news of big values is tempered.

Do I know Bitcoin draws FBAR filing obligations? No, but it’s not a stretch to imagine it in some cases. After all, FinCEN is on to Bitcoin, requiring some to register as Money Service Businesses. FinCEN, the Financial Crimes Enforcement Network, is part of the Treasury Department. Its mission is to safeguard the financial system, combat money laundering and promote national security.

U.S. taxpayers are more worried about their own filings. First, you must report your worldwide income on your tax return. Plus, if you have foreign accounts aggregating more than $10,000 at any time during the year, you must file FinCEN Form 114, also known as an FBAR. They go to FinCEN, not to the IRS.

Subject to a higher (generally $50,000 asset threshold), you may also need to file an IRS Form 8938 to report your foreign accounts and assets. The latter is the new FATCA form, part of the dreaded law that ropes in foreign financial institutions to report to the IRS.

Penalties for tax and FBAR violations can be severe. In fact, FBAR violations can draw far worse civil or criminal penalties than tax violations. That encourages the “when in doubt, file” mentality. And if you’re filing an FBAR anyway, it encourages a “when in doubt, disclose it” mentality too.

Remember, in the case of foreign bank accounts, you must file an FBAR even if you’re just a signatory and you have no beneficial or ownership interest. There’s never a penalty for including too much on your form. What’s an account requiring an FBAR?

Foreign bank and brokerage accounts are generally included. So are offshore mutual funds and pooled investments. However, hedge and private equity funds generally don’t count. An account with a U.S. institution that holds foreign assets doesn’t require a filing as long as you can’t directly access foreign assets maintained in a foreign institution. But foreign branches of U.S. institutions are treated as foreign. See Primer For First Time FBAR Filers.

Is a Bitcoin wallet or account with an exchange a foreign account in the eyes of FinCEN? It seems a stretch to me, but then FinCEN already has its eyes on Bitcoin and users. A more than $10,000 value on account with Mt.Gox, for example, could well trigger an FBAR requirement. Holding that amount of Bitcoin in your own wallet, presumably not.

Still, perhaps some Bitcoin wallets could be seen as a foreign account. A person may spend money to purchase Bitcoin or mine Bitcoin and then exchange the currency for goods and/or services without having to register with FinCEN as Money Service Business. If a miner exchanges mined Bitcoin for money the miner is supposed to register with FinCEN. You’re also supposed to register if you transact in Bitcoin on someone else’s behalf.

Effective July 1, 2013, filers must electronically file FBARs through the BSA E-File System. If unable to e-file, filers may contact the FinCEN Regulatory Helpline at (800) 949-2732 to request an exemption. Help in completing the FBAR is available Monday through Friday, 8 a.m. to 4:30 p.m. Eastern Time at (866) 270-0733 (toll-free inside the U.S.) or (313) 234-6146 (not toll-free, for callers outside the U.S.). Questions regarding FBARs can be sent to FBARquestions@irs.gov. Filers residing abroad may also contact U.S. embassies and consulates for assistance. For E-Filing system questions, call the FinCEN E-Filing Help Desk at (866) 346-9478, option 1 (Monday through Friday, 8 a.m. to 6:00 p.m. Eastern Time).

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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“Penalties for tax and FBAR violations can be severe. In fact, FBAR violations can draw far worse civil or criminal penalties than tax violations. That encourages the “when in doubt, file” mentality. And if you’re filing an FBAR anyway, it encourages a “when in doubt, disclose it” mentality too.”

On the issue of “when in doubt disclose” what are your thoughts on whether the following should be disclosed on an FBAR? (I have heard of people putting some of the following on FBARs):

1. Prepaid phone sim card balances

2. Balances on Gift cards, Amazon, Starbucks, etc.

3. Credit balances on credit cards (refunds, etc.)

4. Bank lines of credit that have not been accessed

etc.

These are areas where people can have money stored. Sounds crazy, but I have heard questions raised with respect to all of these things. Certainly if any of these were “FBARable” then one would think Bitcoin would be too.

Great points about the potential reach of FBARs. Deciding what is and isn’t a financial account isn’t easy. Perhaps it used to not to matter too much, since FBARs were a sleeper topic that few worried over.

But now that FBARs are terribly important and the stakes are so strangely high, it’s not silly to think about all these things that could (conceivably) be covered. Of course, the Bank Secrecy Act FBAR rules were enacted back in 1970!

Don’t forget that any mistakes allow them to raise money through FBAR penalties. This is insane. Such draconian penalties when the law is so unclear. I suppose that the failure of these things to be specified in any of the enabling legislation, regs or form (well I guess we don’t have a form anymore) would be grounds for “reasonable cause”.

Ha! Yes, not having any money (anywhere) does seem a logical if absurd solution. I have really only encountered FBAR penalties and charges in the context of related tax violations. They two seem to go hand in hand, each making the other worse.

I don’t know how FBAR problems (civil or criminal) get handled by the government when they truly stand alone. Unsettlingly, though, for a foreign bank account at least (where FBAR reporting is clear), the government doesn’t have to prove too much to prove willfulness.

I hope to see more comment and discussion on this exact topic from our Gov’t, IRS, etc.

This article seemed to take the route of conservatism, being the son of an accountant, I too will be taking a very conservative route this year unless we hear guidance indiacting the contrary.

Look… this “digital currency” can’ be explained by the silver hair mens club that is washington. But look who is adopting, young 20 somethings and up. Also, could be considered the future of the economy. If we don’t see some guidance, US citizens will be allowing this to pass by. One day the currencies will see a +/- 2% valuation Year over Year, but until then, there’s a hypermonitization wave to be caught.

Fair enough. There are often debates about this. Misunderstandings of the law, even if unreasonable, might contradict willfulness. However, in Williams, a 4th Circuit case in 2012, the government got a big win.

Essentially, the defendant was guilty of willful FBAR violations because the court thought he made a conscious effort to avoid learning about FBARs!

Again, though, this was in the context of tax return violations. That might make the decision a little more defensible. Still, I believe the government has an easier time proving FBAR violations than tax charges.

Yes, would be interesting to see how this issue plays out with a more sympathetic defendant. Of course, the problem is that people with foreign bank accounts are presumed to be criminals and never sympathetic (as all Americans abroad and Green Card holders know).